The two most common and significant trading mistakes are:

  1. Trading too often
  2. Trading too large

Put together, these over-trading tendencies account for the majority of losses among retail traders.

So why do so many people fall into this trap?

The not-so-obvious answer lies in one’s psychological blind spot.

Trading And Drinking Soup

Brian Wansink, a marketing professor at Cornell University carried out a sneaky experiment to observe how the availability of food influenced the degree of its consumption.

Unknown to the eating participants of the experiment, the bowl of soup they were given came attached with a secret tube that kept refilling the bowl. Professor Wansink wanted to study how providing more soup affected consumption levels.

And the results? Those who were provided (unknowingly) with unlimited soup consumed almost 70% more than those with normal soup bowls.

And guess what? None of the unlimited-soup participants noticed they had been slurping on far more soup than usual!

The More You’re Offered, The More You Take

A similar experiment by psychologists from the University of Pennsylvania saw a bowl of M&Ms left in an apartment building, with a small scoop placed at the side.

The next day, they refilled the bowl of M&Ms but this time, they placed a larger scoop beside it.

Can you guess how that affected consumption levels?

When the larger scoop was used, people took 66% more M&Ms.

Same idea, different experiment, same results.

Just like how larger soup servings cause people to eat more of it, the larger scoop made the apartment residents take more M&Ms.

When ‘More’ Gives You A Stomachache

But what about situations where getting more, leads to problems? Like indigestion from over-eating?

Why do people have a tendency to super-size their drink and fries, even when they have a tough time finishing them?

Adam Galinsky, a psychologist at HEC Paris and the Kellogg School of Management had this to say:

The act of choosing a specific size within a set of hierarchically arranged options is one avenue by which individuals signal to others their relative rank in a social hierarchy. As a consequence, larger options would be selected by consumers, not merely out of a functional need for hunger but due to a desire to signal status.

This sounds like a reasonable argument, since our minds are usually preoccupied with attaining greater material assets. We want a larger car, house, more luxurious meals, more advanced electronic gadgets, etc.

And as a trader, you probably already know that people in general are not rational. We buy houses with guest rooms that are never used, sign up for gyms we don’t go to, and buy books we don’t read.

Logically, we shouldn’t be making these decisions. But on a psychological/emotional/social level, our thirst for ‘more’ is deeply rooted in how we perceive ourselves, and how we want to be perceived by others.

It appears that the reason we consume too much food or buy unnecessary things, is because we see that as a way of elevating our social status.

Brokers Like To Offer As Much Leverage As They Can

As I discuss in Forex Dreaming, there’s a conflict of interest with many brokers who stand to gain financially from over-trading on the part of their customers. It’s good business for the brokers, but a poor strategy for the retail traders.

Nevertheless, the need to feel significant (socially speaking) leads masses of unsuspecting traders to keep over-trading.

As we’ve seen, this is due to a psychological tendency that extends to many other aspects of our lives, not just in trading. The lack of self-awareness is in my opinion the biggest problem plaguing retail Forex traders.

So even though many traders know they shouldn’t be taking trades too often (or too large), many will not be able to resist the temptation to fill an emotional void with the thrill of a big win.

Discipline! Discipline! Discipline?

On the internet, practically everyone stresses the importance of “disciplined” trading. That’s like saying that all you have to do to lose weight is eat less and exercise more. It’s logical, yes. But it never works.

What people don’t seem to grasp is that the problem lies not with being disciplined, but in finding a way to trade that requires as little discipline as possible.

Humans have been struggling with discipline ever since we lived in civilized societies, and we will continue to struggle with it for a long, long time. People who want to lose weight, quit smoking or achieve anything significant will always struggle with discipline until they learn how to work around it.

The big lie perpetuated about trading discipline is that once you “get” it, it becomes easy to maintain.

The truth however, isn’t so rosy.

You might be able to be disciplined in your trading for 2 months… but what about 2 years down the road? That will be a LOT harder to keep up with, and it never gets easier.

The moment you follow a trading approach that requires discipline to be successful, it becomes an uphill climb that gets increasingly more difficult over time.